Interest rates seem to have gone a bit crazy in recent months. What’s driving this and what can you do to reduce your costs?
During a period when there has been no change whatsoever in the official Reserve Bank rate, we’ve been through a maelstrom of home loan rate changes from pretty much all lenders.
Nearly all home loan interest rates have gone up to some degree, due to US long term bond rates going up. This is sometimes referred to as the “Trump effect”, although in reality Donald Trump’s election win had little to do with it. The economic situation in the US has been slowly improving for some time, and regulators there are now gradually raising interest rates.
Why do US interest rates affect Australia?
Most Australian lenders source some of their funds from overseas and the rates they pay for those overseas funds tend to be closely correlated to US long term bond rates. For a long while US rates were kept low and stable to help the US economy recover from the GFC, so there wasn’t much impact on Australia from our banks’ overseas borrowing. Now that US rates are on the move, we are feeling the effects.
However there is something else going on that is driving loan rates up even further. Rates are now being much more differentiated based on certain features of the loan. Not so long ago most lenders would charge a given customer the same rate regardless of whether their loan was owner occupied or investment, or whether it was interest only or principal & interest. Four different potential combinations, same loan rate. But not any more.
Now most lenders have four different rates for these options. They are generally charging a higher rate for investment properties than they do for owner occupied, and a higher rate for interest only than for principal & interest.
Why are banks putting up rates more for investment property loans and interest only loans?
Primarily due to pressure from the Australian government regulator APRA. APRA is trying to rein in perceived risks in the Australian property market, by forcing banks to take a more differentiated approach to lending. Whether APRA’s approach is correct or not is a debate for another time. But banks have to toe the APRA line.
Interestingly though, these changes have been fairly consistent across most lenders, so relative competitiveness between lenders hasn’t changed significantly. Big banks have generally increased rates by much the same amount as low cost banks, so overall price competitiveness of low cost banks has persisted in spite of the changes.
What can you do?
If you still have a loan with a big bank, it may be time to look at refinancing to a lower cost loan where you don’t have to pay for big bank overheads. Let us know if you would like some help with identifying good quality potential lenders and arranging the switch. With interest rates going up, the savings from a lower cost lender may help to offset some of the impact.
If you have an interest only loan, you may also be able to get a lower rate by switching to principal and interest, however there may be other potential cost and tax impacts from doing this so make sure to get good advice first.
If you have an investment loan, it may also be possible to get lower rates with some lenders if your investment loan is secured against an owner occupied property. This can have complex ramifications too, so as always, get good advice first.